By Will Smale
Business reporter, BBC News
The consortium is expected to want to sell and lease back stores
A takeover battle is brewing over Sainsbury's.
Retail analysts expect private equity consortium CVC, Kohlberg Kravis Roberts and Blackstone to make a formal bid for the UK's third largest supermarket chain within days.
"A bid is very likely," says Alaistair Johnston of JP Morgan. "Probably this week, maybe next week."
It follows after the European-US private equity grouping first said at the start of this month that it was "considering" an approach.
While Sainsbury's has so far refused to comment, most retail analysts expect its board will successfully resist any takeover attempt.
Though others expect the bid to succeed.
But firstly, why is Sainsbury's a takeover target?
In simple terms, the private equity consortium thinks it can make a lot of money from a combination of asset sales and improvements to the way the business is run.
Now in the final 12 months of a three-year recovery plan, the once struggling Sainsbury's has seen both its sales and profits recover under chief executive Justin King, who took over in autumn 2004.
In that time Mr King has turned the company around by cutting jobs, closing underperforming stores and improving the supply and distribution chain.
Yet the private equity consortium appears to think it can do better.
While it has not revealed any details of its proposed plans, retail analysts agree that the consortium has its eyes on the property value of the Sainsbury's stores, which are often located in city centres where commercial property is expensive.
"They would sell off a huge chuck of the Sainsbury's stores, and then lease them back," says David Stoddard of Teather and Greenwood.
"This could release a huge amount of cash."
Increased non-food goods?
Yet what would any takeover mean for consumers?
Chief executive Justin King has turned around Sainsbury's fortunes
Mr Stoddard adds that despite the turnaround under Mr King, there is still room for the private equity consortium to make improvements, helped by the funds released from selling then leasing back stores.
"You have to say that the current Sainsbury's management team has done a good job, but without question, the distribution network can still be greatly improved," he says.
"We are also hearing that the consortium would like to free up more space for non-food items such as electrical and clothing goods, where Sainsbury's trails behind Tesco and Asda.
"Yet this would not be as simple as it sounds, as the additional space would be hard to come up with, as Sainsbury's generally has smaller stores than its rivals."
A majority of retail analysts think any CVC-led bid will fail for a number of reasons, most pressingly the price they would have to pay for Sainsbury's shares.
Before CVC, Kohlberg Kravis Roberts and Blackstone first expressed their interest, Sainsbury's shares were trading at 440p. Now they are selling for around 520p.
"I'm not sure the maths now adds up for a successful takeover," says one analyst who asked not to be named.
"The killing ground [to successfully buy Sainsbury's] would now be between 570p and 580p.
"I would imagine that that would stretch the consortium's finances too far.
"But I still think they have to come forward with a formal bid for credibility reasons."
Yet Jonathan Pritchard of Oriel Securities is one analyst who expects any bid from the CVC-led consortium to succeed.
"If they make a formal bid, I think they are extremely likely to be successful.
"I can see a bid between 550p and 575p being accepted."
However, the other major factor that most analysts say would enable the Sainsbury's board to successfully see off any bid, is the private equity group's expected plans for major store sales and lease backs.
"The Sainsbury's management are in a very strong position," says Mr Johnston.
"They can, for example, simply say to the shareholders that they will sell off the stores themselves, that they can do this on their own without a private equity group having to take its slice."
Other analysts point to Sainsbury's strong recovery under Mr King, and that most shareholders would back the board because of the firm's ongoing strong performance.
One major factor in any takeover tussle is the ongoing large shareholding of the founding Sainsbury family.
While the stake of the Sainsbury family trust has recently been slightly reduced to 13.9%, analysts are divided on whether the family would be happy to see the company fall into the hands of private equity investors.
The analysts stress the reputation of the private equity industry as a whole, whether unfair or not, for ruthless asset stripping.
The Sainsbury family has yet to comment on the takeover speculation.
Another uncertainty is whether any bid from the CVC consortium could lead to rival takeover offers.
Some names suggested in the media include a rival combined private equity approach from UK firm Cinven and US group Texas Pacific, Asda owner Wal-Mart, and food and clothes retailer Marks & Spencer.
While most retail analysts do not currently see these as serious potential bidders, they say the ongoing uncertainty surrounding Sainsbury's is only good for its rivals.
"It all plays into the hands of Tesco and Asda," says Mr Stoddard.
"Tesco and Asda could easily increase the pressure on a distracted Sainsbury's.
"Everything from price cuts to promotions, longer opening hours or additional staff on tills."